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India Equity Research Reports, IPO and Stock News
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India - MARKET
How to play ‘hope’
Chunkier-than-expected hike, but more policy actions are required.
Although delayed, the government’s 9-20% hike for diesel and cooking
fuels has been chunkier than we expected. State-owned oil companies will
be the biggest gainers, given the 6-57% upgrade to FY13CL EPS. Hopes
on positive policy actions will start to revive, but with the overhang of
inflation, fiscal slippage and a shaky global outlook, strong follow-through
is essential for a broader market rerating. We prefer to play “hope”
through well-established players, such as L&T, BHEL, IDFC, JPA and
Coal India.
Chunky fuel price hike. After a month of prevarication, the government
has announced a set of actions to curb the under-recoveries of public
sector undertaking (PSU) oil marketers struggling with high crude prices:
It has hiked prices by 9% for diesel, 20% for LPG and 14% for kerosene,
and cut in import/excise duties. FY12 under-recoveries should reduce by
US$10bn. The integrated R&Ms Bharat Petroleum (BPCL IB - Rs634.4 -
U-PF), HPCL (HPCL IB - Rs392.5 - U-PF) and Indian Oil (IOCL IB -
Rs337.1 - U-PF) should see FY13CL EPS upgrades of 23-57%, but ONGC
(ONGC IB - Rs272.8 - BUY), Oil India (OINL IS - Rs1,286.7 - BUY) and
Gail (GAIL IB - Rs448.7 - O-PF) too should see a 6-39% pickup from our
earlier estimates. We prefer the upstream stocks; we have upgraded
ONGC from Outperform to BUY with an Rs375 target price. R&Ms’ return
ratios and cashflows will remain under pressure in the medium term.
Downside for Ind cos which are global plays
Comparison of earnings gth
(20)
(10)
0
10
20
30
40
50
FY07 FY08 FY09 FY10 FY11 FY12
(%) Domestic plays
Global plays
Source: CLSA Asia-Pacific Markets
India - investor positioning already defensive. The Indian market
(Sensex down 14% YTD) is the worst-performing market in the region.
Investors remain concerned about inflation and a slowing investment cycle.
Investment/infrastructure plays are down 16-20% YTD. The shift to
defensive sectors is visible in the 1.4% rise for FMCG, only an 8% fall for
pharma. Divergence in stock performance is also reflected in 23 stocks
(largely consumer and pharma) under our coverage trading within 10% of
their 52-week high, when the market is just 1% above its 52-week low.
A positive step, but macro environment remains challenging. The
price hikes will translate into a one-shot 0.6ppt rise in WPI inflation, but
the overall impact is likely to be higher, as freight rates move up on loftier
diesel costs. With WPI inflation still at +9%, we see the 50bps more in
rate hikes by the RBI. While the c.US$9bn revenue loss arising from the
tax cuts can be made up by stronger income from the PSUs and a lower
subsidy share (we assume 55% now), the fiscal accounts remain
underprovided for at least Rs355bn of subsidy burden. Uncertainty in the
USA and EU financial markets will weigh on equity risk premiums.
Follow through will be essential. The fuel price action is a pleasant break
from a phase of virtual policy paralysis. Quick decisions on a few issues
pending approval/legislation - such as Cairn-Vedanta, coal blocks, FDI in retail
and land acquisition - can give the government a face-lift. Based on precedent
(1H10), the distractions on the political front and the challenging macro
environment, it looks premature to assume that this will happen.
Play “hope” through well-established franchises. Larsen & Toubro
(LT IB - Rs1,739.0 - O-PF), BHEL (BHEL IB - Rs1,947.2 - BUY), IDFC
(IDFC IB - Rs124.2 - BUY), JPA (JPA IS - Rs79.3 - BUY) and Coal India
(COAL IS - Rs390.0 - O-PF) are positively geared to any acceleration in
policy actions, but with superior downside protection and base-case upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India - MARKET
How to play ‘hope’
Chunkier-than-expected hike, but more policy actions are required.
Although delayed, the government’s 9-20% hike for diesel and cooking
fuels has been chunkier than we expected. State-owned oil companies will
be the biggest gainers, given the 6-57% upgrade to FY13CL EPS. Hopes
on positive policy actions will start to revive, but with the overhang of
inflation, fiscal slippage and a shaky global outlook, strong follow-through
is essential for a broader market rerating. We prefer to play “hope”
through well-established players, such as L&T, BHEL, IDFC, JPA and
Coal India.
Chunky fuel price hike. After a month of prevarication, the government
has announced a set of actions to curb the under-recoveries of public
sector undertaking (PSU) oil marketers struggling with high crude prices:
It has hiked prices by 9% for diesel, 20% for LPG and 14% for kerosene,
and cut in import/excise duties. FY12 under-recoveries should reduce by
US$10bn. The integrated R&Ms Bharat Petroleum (BPCL IB - Rs634.4 -
U-PF), HPCL (HPCL IB - Rs392.5 - U-PF) and Indian Oil (IOCL IB -
Rs337.1 - U-PF) should see FY13CL EPS upgrades of 23-57%, but ONGC
(ONGC IB - Rs272.8 - BUY), Oil India (OINL IS - Rs1,286.7 - BUY) and
Gail (GAIL IB - Rs448.7 - O-PF) too should see a 6-39% pickup from our
earlier estimates. We prefer the upstream stocks; we have upgraded
ONGC from Outperform to BUY with an Rs375 target price. R&Ms’ return
ratios and cashflows will remain under pressure in the medium term.
Downside for Ind cos which are global plays
Comparison of earnings gth
(20)
(10)
0
10
20
30
40
50
FY07 FY08 FY09 FY10 FY11 FY12
(%) Domestic plays
Global plays
Source: CLSA Asia-Pacific Markets
India - investor positioning already defensive. The Indian market
(Sensex down 14% YTD) is the worst-performing market in the region.
Investors remain concerned about inflation and a slowing investment cycle.
Investment/infrastructure plays are down 16-20% YTD. The shift to
defensive sectors is visible in the 1.4% rise for FMCG, only an 8% fall for
pharma. Divergence in stock performance is also reflected in 23 stocks
(largely consumer and pharma) under our coverage trading within 10% of
their 52-week high, when the market is just 1% above its 52-week low.
A positive step, but macro environment remains challenging. The
price hikes will translate into a one-shot 0.6ppt rise in WPI inflation, but
the overall impact is likely to be higher, as freight rates move up on loftier
diesel costs. With WPI inflation still at +9%, we see the 50bps more in
rate hikes by the RBI. While the c.US$9bn revenue loss arising from the
tax cuts can be made up by stronger income from the PSUs and a lower
subsidy share (we assume 55% now), the fiscal accounts remain
underprovided for at least Rs355bn of subsidy burden. Uncertainty in the
USA and EU financial markets will weigh on equity risk premiums.
Follow through will be essential. The fuel price action is a pleasant break
from a phase of virtual policy paralysis. Quick decisions on a few issues
pending approval/legislation - such as Cairn-Vedanta, coal blocks, FDI in retail
and land acquisition - can give the government a face-lift. Based on precedent
(1H10), the distractions on the political front and the challenging macro
environment, it looks premature to assume that this will happen.
Play “hope” through well-established franchises. Larsen & Toubro
(LT IB - Rs1,739.0 - O-PF), BHEL (BHEL IB - Rs1,947.2 - BUY), IDFC
(IDFC IB - Rs124.2 - BUY), JPA (JPA IS - Rs79.3 - BUY) and Coal India
(COAL IS - Rs390.0 - O-PF) are positively geared to any acceleration in
policy actions, but with superior downside protection and base-case upside.
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